Impact on commercial contracts

Pete LawleyMichael Schouten

Ensure preparedness for discussions

Pending M&A, commercial and capital markets transaction processes may be paused, slowed down or reconsidered. Counterparties may also be looking to terminate or renegotiate existing commercial contracts.

Pending transactions may be paused or reconsidered

Pending M&A, commercial and capital markets transaction processes may be paused, slowed down or reconsidered once an immediate crisis hits. Counterparties may also be looking to terminate or renegotiate existing commercial contracts. Purchasers and counterparties could second-guess compliance with every condition precedent, representation or undertaking, and request additional confirmations that may become difficult for the company to confirm or reconfirm. Mapping related risks and opportunities at short notice and preparing for various scenarios (having a plan A, B and C) will ensure preparedness for any discussions

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Uncertainty may impact ongoing transactions and commercial contracts

Pending M&A, commercial, financing and capital markets transaction processes may be paused, slowed down or reconsidered. In many cases, this is the result of general uncertainty about how the unfolding situation will impact the company, the markets and/or the global economy. Dealmakers are often reluctant to take big steps in such circumstances. In other cases, the target may be directly impacted by the developments or the sell-side may need time to assess whether and how the developments will impact the target business.

  • Live M&A and other corporate transactions: Some of these processes may stop entirely. However, recent experience shows that, if and when the issue at hand becomes a "known" element to market participants, activity could rebound quickly and strongly. At that time, there is likely to be increased focus by sellers on deal certainty, but also reputational and compliance risks. We may see an increase in termination rights or other conditionality related to the issue at hand. Buyers able to move quickly, show committed financing, and otherwise demonstrate limited deal certainty risk, will be best placed to capitalise in any market rebound.
  • Commercial contracts: Counterparties, such as suppliers and customers may also be looking to terminate or renegotiate existing commercial contracts. Parties may second-guess every condition precedent, representation and undertaking and look for means to renegotiate a signed contracts. Although the issue at hand may not be relevant in certain material commercial relationships, counterparties may see the potential breach of contract as an opportunity to coerce renegotiations or termination of contracts if preferred also based on other reasons. There may also be a need or wish from the Company to amend contract terms.

In each of the aforementioned situations, we expect that there will be a continued focus on, and scrutiny of, (closing) conditions, representations and undertakings relating to the issue at hand and Material Adverse Change clauses in M&A and commercial contracts.

It is key to face these potential risks and opportunities head on and to assess commercial contracts and financing arrangements. Mapping related risks and opportunities on short notice, and preparing for various scenarios (i.e. having a plan A, B and C) together with financial and legal advisers ensures preparedness for any discussions. This allows the Board to show the company's counterparties, financiers and the buy- or sell-side that the Board is in control.

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